RINs redux

Published at 10:09 10 Mar 2017 by

Global gasoline markets corrected sharply in early March, precipitated by a rumoured shift in arcane US biofuels blending rules and another slump in Asian gasoline cracks, which had enjoyed a strong start to the year. The correction was much-needed. The market had bid up summer-grade gasoline prices in the hope that the factors that undermined the summer gasoline season in 2016 would somehow not make another appearance.

The rout quickly brought in bargain hunters who erased much of the sell-off in cracks and spreads worldwide. With gasoline inventories in the Atlantic basin set to fall seasonally, bullish players will have the wind at their backs for the next few weeks. USEC gasoline stocks are likely to draw by some 8-10 mb through the end of April on our estimates, given our expectation of very low imports in the coming weeks due to European turnarounds.

Yet amid the RINs saga, and notwithstanding its recent recovery, the gasoline market appears to have somewhat lost track of fundamentals. Adjusted for RINs costs, the spread between May RBOB futures and May Eurobob gasoline swaps has been pulled out of alignment. Leaving out the cost of RINs shows a firmly closed forward arbitrage. The price trend this month has been even less favourable. May RBOB needs to rise relative to May Eurobob.

How this situation resolves itself depends a lot on what happens in Europe. European outages continue to creep up, with CDU shutdowns expected to average more than 1.7 mb/d this month, but planned work later in the spring is lower y/y. While there is a widespread expectation that European turnaround numbers will continue to rise for April and May, we are likely at the peak of European seasonal refinery work. With forward margins still positive, this means plentiful European gasoline supplies.

US gasoline bulls will need European barrels to be bid away by other markets. West African gasoline demand has recovered and will be higher y/y thanks to rising Nigerian oil output, while Latin American gasoline import requirements are recovering as regional refineries struggle with operational problems. But the US Gulf Coast is poised to capture most of the growth in Latin American gasoline import needs, as new infrastructure supports higher exports.

This leaves East of Suez markets as the only realistic bidder for large volumes of European gasoline, but with Chinese refinery start-ups and expansions set to return to a faster pace this year after a lull in 2016, Chinese demand for mixed aromatics imports may not grow fast enough to bring about serious competition for European gasoline blending components in the summer. Subsidy withdrawal in the Middle East will also rein in demand, lessening the pull on Europe.

In all likelihood then, European markets are likely to be well-supplied with gasoline later in Q2 17 unless refinery work picks up sharply in April and May. We are pessimistic about gasoline as a whole amid growing supplies and slowing demand, but opportunities abound as the RINs drama occludes broader fundamentals. The US East Coast still needs imports, so it is clearly incongruous for the arb to be so marginal and for a contango to further develop in RBOB futures. One or the other will have to give.


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